Debit Card Growth Continues to Skyrocket; Surpassing Other Payment Instruments

Implications: Over the past five years consumers have chosen "debit cards" as their preferred payment of choice, trumping credit cards, cash, checks and other forms of payment. 63% of consumers chose debit cards for ease of use;57% perceive debit cards are safe and secure;53% chose debit cards because they can pay with their own money;while 49% said there is "no annual fee" assessed and 46% prefer debit cards because they provide access to cash. Debit cards growth has spilled over into POS (Point-of-Sale) transactions and fall into two categories: signature and PIN secured debit cards. Both types of cards draw on funds in a consumer's DDA (Demand Deposit Account). Debit cardholders can choose whether to authorize a POS debit card purchase with a signature or by entering a PIN. Based on whether the consumer chooses signature or a PIN secured POS transaction determines which type of payment network will process the transaction, i.e. a branded network or ATM/EFT network (Electronic Funds Transfer).

Analysis: The U.S. payments model has evolved over the last decade and as new payment instruments enter the market, i.e. contactless, smart cards, P2P (Person-2-Person), m-payments, direct debit, online billpay, etc., "debit cards" has emerged as the "king of cash" and holds the status of "most preferred" card of consumers and as a result, debit card usage has surpassed credit card usage. Since 2005, debit card volume has trumped credit volume and debit card growth is attributable to its popularity, ease of use and consumers' preference to pay with their own money and debit card volume is projected to increase and now accounts for over 33% of total consumer payment transactions.

1.  Debit cards fall into two categories: Signature debit and PIN secured debit cards. Signature debit cards are branded by Visa, MasterCard and/or the Discover network and payment is authorized by a cardholder's signature and the transaction is processed over these same networks. PIN debit cards are processed using regional ATM or EFT (Electronic Funds Transfer) networks, such as the STAR/First Data network, NYCE, PULSE, Accel-Exchange or the Co-op network and other regional networks

2.  Banks and card networks Visa, MasterCard and Discover push for signature debit transactions because they can make more money via "interchange fees." Interchange is a percentage of each transaction that Visa and MasterCard's issuing banks collect from retailers every time their debit cards and credit cards are used to pay for a purchase

Takeaway:  The exponential growth in debit card volume has bought out fraudsters who want to capitalize on debit card growth by hacking into  large batches of payment card data by penetrating databases via LANs and wireless networks. The TJX data breach that exposed more than 94 million debit and credit cardholders is a good example of how fraudsters can hack into a merchant's database and commit fraud. Despite challenges in the debit card market, including fraud and infrastructure challenges, debit cards are poised for future growth and could continue to erode volume and market share from other payment instruments, including cash, checks, credit, contactless, smart cards, m-payments, etc.